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Sociable

Saturday, 25 July 2009

The government said on Friday a discussion paper on Direct Tax Code, which seeks to simplify the tax laws, will be released by August

20.

"The preparation of a simplified new income tax law is in progress. The new Direct Tax Code will be released along with the discussion paper by August 20," minister of state for finance, S. S. Palanimanickam, told the Lok Sabha in a written reply.

While presenting the Union Budget for 2009-10, finance minister, Pranab Mukherjee, had said that in order to bring in tax reforms in the country the government will bring the new DTC within 45 days.

"The Direct Tax Code, along with a discussion paper, will be released to the public for debate. Based on the inputs received, the government will finalise the Direct Tax Code Bill for introduction," the finance minister had said.

The code will replace the existing Income Tax Act, which was enacted in 1961 and would subsume the direct tax legislations.

The Income Tax code is expected to reduce the plethora of exemptions given to various segments of tax payers.

Talking about the proposed tax code, former finance minister, P. Chidambaram, had said that the marginal rate of taxation, including education cess, stood at 33.99 per cent.

"My endeavour has been to increase the effective rate of corporate tax paid by corporations but I confess my efforts are not entirely successful because of the demands for continuing exemptions or introducing new exemptions," he had said.

The Economic Survey had also suggested that the new simplified law should be put in place to replace the over four-decade old Income Tax Act and streamline the direct taxations structure.

IT companies reconciling to pay more tax as STP exemption ends

"Introduction of the new Income Tax Code that results in natural corporate tax regime (is needed)," Economic Survey had said.

Tuesday, 21 July 2009

An Investing Illusion

By Dhirendra Kumar | Jul 20, 2009

A few days ago, I read an interesting article by an American security expert named Bruce Schneier. He is a cryptographer and computer security specialist who has evolved into a thinker and writer about all kinds of risks and security. I find it very interesting that some of his ideas about risk and human reactions to it have great relevance to investing. A couple of years ago, I wrote about how people tend to overrate the risks they face from rare but dramatic events and underestimate those from mundane everyday risks.

Schneier talks about a 'Control Bias' where we tend to underestimate risks in situations where we are in control, and overestimate risks in situations when we are not in control. The most common example is the fear of flying vs the perception of risk while driving. There's clear evidence that flying in a commercial airliner is by far the safest mode of transport that there is. In contrast, Indian roads are quite unsafe. Yet, many sensible people have a deep fear of flying but are quite unconcerned about driving.

Worse, people take slippages in risk levels on the road unthinkingly. They chat on their phones while driving (it's not unusual to see two-wheeler riders type SMS messages while driving); they drive after having had a couple of drinks; they drive when they know their brakes or tyres are not good; they overtake while turning and so on. Yet, they are scared of flying. All these could be examples of ‘Control Bias’.

When we are doing something ourselves, we have an illusion of control. We underestimate risk because we are in possession of all the facts and we feel that we can control the situation when in reality we can't. When flying, we really don’t know what’s happening so we do not have the illusion of control.

I find that this false impression of control is exactly what make people underestimate risk while investing. It is a fact that most people don’t know enough to be dabbling in stocks. Yet they do so because they have a large amount of information which makes them believe that they know enough to be in control of the situation. Someone sells investors a story about why a stock will do well and the story appears to have enough information to give an adequate illusion of control.

This is also the reason why many genuinely knowledgeable investors advise even newbies against investing in mutual funds (MFs). These people have enough information of stocks but feel inadequately informed about what is going on if their money is in a MF. The fund investment manager is like pilot and you don’t know what he’s doing.

Unfortunately, investing also has its equivalent of driving drunk or without good brakes and tyres. Almost no individual stock investor follows any systematic risk-control on their portfolio. They don’t diversify properly. They allow their portfolio to have odd concentrations in one or two stocks or sectors and they don’t track exactly what is happening with the stocks they have already bought. The fact that they are doing things themselves gives them the illusion that they know what’s happening and if the situation gets tricky they’ll manage to get out of it.

Tuesday, 14 July 2009

Q. I am buying a residential land in sector 9 in Gurgaon. I want to take home loan from a bank. Though I am not sure if I would get income tax benefit on this or not. I am getting different information from different people. Sombody is saying that if I take Land + Construction loan then I would get IT rebate. But I am not clear if I would get rebate on complete loan or only loan component which is given for construction. - Brajesh Jain.

Ans. Dear Brajesh, Plz. note in order to avail Income Tax benefit on home loan, the construction should completed within 3 years from the date of disbursal of home loan.

Now considering ur case, following options r there for u.

1. Land purchase thru Loan & construction from own money - In this case, although the loan was taken primarily to purchase land still u can avail the tax benefit on this loan if u have constructed ur house on this land within the 3Y period.

2. Lan purchase as well as construction both r from loan - In this case again u can avail tax benefit on total loan condition the construction is completed within 3Y.

Plz. note as the construction `ll take time to complete, the interest paid by u in between on land loan or land + construction loan `ll not be available for tax benefit in the same FY. But u can carry over the same & avail @ 20% each year from the FY of completion of construction.

Sunday, 12 July 2009

It was many years ago that I first read the book Small is Beautiful by the economist E.F Schumacher. It's not a popular book in business circles. Shumacher's concepts of getting by with the least possible and smallest possible set of resources seem outlandish to a certain audience. To most businessmen, 'enoughness' seems to be an idea more suited to a hippie commune from the sixties than to the world as they see it functioning.

This may seem like a long jump, but I personally believe that for a non-professional investor, a derivation of Shumacher's approach would work very well an investment philosophy. This is something that I would call the 'Simple is Beautiful' approach. It could also be called 'Do Less to Do More' approach.

This approach is based on my belief, borne out of many years of interacting with investors, that far more people go wrong by trying to do much than by doing too little. In personal investments, the solution is not to do a lot, but to do only the minimum possible.

The 'Simple is Beautiful' approach means sticking to some basic time-tested principles; by investing in the minimum possible number of securities and by taking the fewest possible actions. In the last couple of decades, the culture of investing (and of finance in general, and perhaps of all business) has shifted towards a worship of complexity for its own sake. More and more people assume that any investment methodology that doesn't involve mysterious formulae, and arcane ratios and elaborate charts couldn't possibly deliver the goods. The truth is the exact opposite. This complexity is just smoke and mirrors erected by a priesthood in order to create a need for their services.

How would such a simple approach work in practice? Here's one example, which could well serve as the recipe for the perfect financial plan. You should keep all the money that you might possibly need for at least the next five-to-seven years in a safe fixed-income investment.

The reason is obvious-this is the money that must always be on call. Only safety matters, nothing else. Longer term investments should be invested in a small number -- three to four -- of conservatively run equity funds with a good track record. Remember, the five-to-seven-year time horizon is a sliding window. Money should be moved from equity to fixed income as its date of usage comes near. The investments in equity should be gradual -- shoving money into equity-backed investments in one fell swoop when things get hot is courting disaster, but I suppose everyone should know that after the experience of the last couple of years.

Is this an example the best possible plan? Well, that depends on your definition of best. I think this plan is the best one because its basic principles require no further understanding. It's optimised not for returns, but for the best combination of comprehension and returns. It’s very important to do only those things that we understand ourselves.

In personal finance, there are few issues that are as full of obfuscation, such as insurance. Few financial products that are intended for individuals are as full of complexity as modern insurance products. However, keeping the ‘Simple is Beautiful’ principle in mind, it isn't difficult to cut through this thicket.

Here's what you need to do. Make a liberal estimate of how much money your family will need if you should fail to wake up tomorrow morning and buy the cheapest term insurance you can find. Do diversify your insurance across LIC and two private insurers -- one is no longer confident of who's going to be solvent tomorrow. You should buy lots of term insurance, but never even think of buying any other product from an insurance company. In their mixed savings+insurance products like ULIPs, the huge commissions and obfuscated expenses they charge will kill your real returns.

One important component of the ‘Simple is Beautiful’ approach is to somehow avoid having to react to market ups and downs. This is a major advantage of the kind of approach to investment that I'm describing.

If you have an investment plan needs tailoring to suit the season then it's useless to begin with. Almost by definition, the only useful approach to investing is one that does not need to change in reaction, or worse, in anticipation, of events. The approach that I describe would be just as good during the lows of March 2009 as it was at the highs of January 2008. Or in fact at any other point of time in the past decades. The ‘Simple is Beautiful’ approach is structured around your life, not that of some investment market. In this approach, you change your financial plan when something happens in your life, not in the stock market.

One characteristic of this approach is the emphasis on understanding things yourself rather than being dependent on some expert who is pushing his own agenda. This goes against the grain of modern financial industry, but understandability is a more important characteristic of any investment than high returns or anything else. Far more people get into trouble by putting money into things that they don't understand rather than by earning a little lower return.

Does that mean that experts are not needed at all? Not really, except perhaps to tell you that you don't need an expert! Seriously, this is the gold standard of investment principles. No one should ever dabble in an investment that they don't understand personally. It's better to let a good investment pass by rather than invest in anything that you don't understand. An expert's role is not to tell you where to invest -- it's to show you how to decide for yourself.

We have bought a residential bungalow worth Rs. 41 lacs, and we are three joint holders of the property (Me, my wife and my father). We have taken home loan of Rs.32.8 lacs (80% of actual price) from bank. I and my wife are working as salaried employees of an IT firm and we are repaying the loan, where loan installment per month is Rs.27000 (16000 and 11000 paid by me and my wife respectively).

Now, my queries are as follows:

1. Is it possible that I can take the loan of Rs.6 lac from my mother, to pay rest of the bungalow price? If yes, then what are the tax implications for me & my wife as well as my mother & what are the legal documents required for the same?

2. Can I & my wife both avail the tax exemption on home loan interest (for loan from bank as well as from my mother)? If yes, then what shall be ratio to avail exemption?

Here I assume, that this 2.2L Rs. r coming from ur father only. Even if both of u do have a part in this 2.2L amt. also plz. do inform me for the same.

As per my assumption share of both of u in the house = 38.8L Rs.

Share in Bank loan EMI = 16000 & 11000 & the same ratio both of u may continue for ur mother`s loan.

Now here comes the answer for ur queries.

1. Yes it`s possible for both of u to take home loan of additional 6L Rs. for the same house from ur mother. The interest paid for this loan to ur mother, `ll be available for Tax benefit for both of u in the ratio as stated above. The interest received by ur mother from both of u `ll be her taxable income & if her total income from all other sources is more than the zero tax limit for her (1.9L Rs. or 2.4L Rs, depending upon her age, as the case may be), she w`d have to pay Tax on it. For this loan, u should prepare a loan agreement between ur mother & both of U.

2. Yes both of u can avail tax benefit on the interest & principal repmt. of bank loan & interest only for mother`s loan. But from ur query it seems that the house in Question `ll be self occupied, hence u & ur wife can`t claim more than 1.5L Rs. each, (1.5+1.5 = 3L) interest on combine loan.

As the amount in P above is more than M above, so no LTCG Tax liability is there.

Yes u r right.

Thanks

Ashal

Dear Ashal!

Thanks for the prompt response and detailed calculations.

One more modification would be introduced to this calculation because I did not furnish you with that info.

I had financed this purchase in 1988 with the help of Loans from BHEL and Cement Corporation of India. I have not preserved the interest records. The amount was borrowed in 1984, 1985 and 1986 and repaid completely in 1991.

As I do not know the interest quantum, I do not know what to do with that.

Any suggestions would be welcome. Thanks once again.

Subasu

Dear subasu, as the records of loans are not with u, also the applicable FYs r also date very back.